Sherene Nili manages a company that produces wedding gowns. She produces both a

Question

Sherene Nili manages a company that produces wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month: Custom DressesStandard Dresses Total 30 Number of dresses Sales revenue 20 500 S 7,500 8,500 250 2,300 600 $ 9,500 19,500 17,000 28,000 800 6,000 1,600 2,300 3,700 1,000 Heat and light Other production coets Total coets 62,900 Operating prot S 12,100 Ms. Nili already has orders for the 10 custom dresses reflected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of $1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate tor 800 hours, of which 550 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $6,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of floor space occupied. A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili's company is working at capacity and would have to give up some other business to make this dress. She can't renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay $22,900 for the special order. Materials and labor for the order will cost $5,500 and $9,500, respectively. The special order would require 115 hours of machine time. Ms Nilr's company would save 125 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order Required: a-1. Calculate the dirferential operating profit (loss). (Select option "increase" or "decrease", keeping Without special order as the base. Select "none" if there is no effect.) Labor Machine deprediation Contribution margin Heat and light Other production costs Marketing and administration Operating prof (loss) a-2. From an operating profit (loss) perspective for March, should Ms. Nili accept the order? Yes No b. What is the minimum price Ms. Nili should accept to take the special order?

Explanation / Answer

a-1

Pl see below table. We can see that by making the custom dress(Last Col), Ms Nili is generating an addl profit of $2160

It is assumed that for Std dress, the sales rev is directlyprop to no of dresses & so is material & labour.

a-2 Ms Nili should take the order.

Mrs Nill Custom Dresses Standard Dresses Total Custom Dresses Standard Dresses Total New Custom Oder No of Dresses 10 20 30 10 10 30 10 Sales Revenue $47,500 $27,500 $75,000 $47,500 $13,750 $61,250 $22,900 Less Variable Cost Materials $9,500 $7,500 $17,000 $9,500 $3,750 $13,250 $5,500 Labour $19,500 $8,500 $28,000 $19,500 $4,250 $23,750 $9,500 Machine Depr $550 $250 $800 $550 $125 $675 $115 Total Contrn $17,950 $11,250 $29,200 $17,950 $5,625 $23,575 $7,785 Less Fixed Cost Rent $3,700 $2,300 $6,000 $3,700 $2,300 $6,000 Heat and Light $1,000 $600 $1,600 $1,000 $600 $1,600 Gross Profit $13,250 $8,350 $21,600 $13,250 $2,725 $15,975 Other Prodn Cost $2,300 $2,300 Mktg and Admin $7,200 $7,200 Op Profit -Old Order $12,100 Op Profit-New Order $6,475 $7,785 New Gross Profit $14,260 Addl Profit due to new order $2,160

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